2024 Q4 encryption venture capital review Which tracks are attracting new capital inflows?

Authors: Alex Thorn, Gabe Parker, Galaxy; Translated by: Wu Zhu, Golden Finance

Introduction

2024 has been a stellar year for the crypto market, with the launch of a spot Bitcoin ETP in January and the election of the most pro-crypto president and Congress in U.S. history in November. Overall, the liquid crypto market added $1.6 trillion to its market capitalization in 2024 and grew 88% year-over-year to $3.4 trillion. Bitcoin alone added $1 trillion to its market capitalization, bringing it to nearly $2 trillion for the year. **The crypto narrative for 2024 is driven by Bitcoin’s skyrocketing rise (62% of total market gains) on the one hand, and meme and AI on the other. Memes are hot cryptocurrencies for most of the year, with most on-chain activity happening on Solana. In the second half of the year, tokens operated by AI agents took center stage in the pre-Bitcoin cryptocurrency space.

Cryptocurrency venture capital in 2024 remains challenging. Major Bitcoin, meme, and AI tokens are not particularly suitable for venture investment. Memecoins can be launched with just a few clicks, and both Memecoins and AI tokens exist almost entirely on-chain, leveraging existing infrastructure primitives. Hot sectors from the last market cycle, such as DeFi, gaming, the metaverse, and NFTs, either failed to capture market attention or have already been built, requiring less capital, making new ventures more competitive. The infrastructure for the crypto market and gaming has largely been established and is now in a late stage, and with anticipated changes in U.S. regulations under the next government, these sectors may face competition from entrenched traditional financial intermediaries. There are indications that new meta currencies could become an important driver for new capital inflows, but these meta currencies range from immature to very nascent: notably, stablecoins, tokenization, the convergence of DeFi and TradFi, and the overlap between crypto and artificial intelligence.

Macroeconomic and broader market forces continue to exert resistance. The high interest rate environment continues to pressure the venture capital industry, making allocators less willing to take further risks on the risk curve. This phenomenon is squeezing the entire venture capital industry, but given its risks, the crypto venture capital sector may be particularly affected. Meanwhile, large integrated venture capital firms largely continue to stay away from this field, perhaps still feeling cautious after several well-known venture capital firms went bankrupt in 2022.

So, while there are significant opportunities ahead, whether through the resurgence of existing originals and narratives, or through the emergence of new originals and narratives, crypto venture capital remains competitive and subdued compared to the frenzy of 2021 and 2022. There has been an increase in both trading and investment capital, but the number of new funds has stagnated and the capital allocated to venture capital funds has decreased, creating a particularly competitive environment conducive to valuation negotiations by founders. Broadly speaking, venture capital is still well below the levels of previous market cycles.

However, the increasing institutionalization of Bitcoin and digital assets, the growth of stablecoins, and the new regulatory environment may ultimately signal a potential convergence between DeFi and TradFi, bringing new opportunities for innovation. We anticipate that venture capital activity and interest may see a significant resurgence by 2025.

Summary

• In the fourth quarter of 2024, venture capital investment in cryptocurrency startups reached $3.5 billion (a quarter-on-quarter increase of 46%), involving 416 transactions (a quarter-on-quarter decrease of 13%).
• In 2024, venture capitalists invested $11.5 billion in 2,153 deals in startups focused on cryptocurrency and blockchain.
• Early-stage deals received the most capital investment (60%), while late-stage deals accounted for 40% of invested capital, up significantly from 15% in the third quarter.
• In the second and third quarters, the median valuation of venture capital transactions increased, with the valuation growth rate of cryptocurrency-specific transactions outpacing the overall venture capital industry, but remained flat quarter-over-quarter in the fourth quarter.
• The amount of funds raised by stablecoin companies is the highest, with Tether leading the way by raising $600 million from Cantor Fitzgerald, followed by infrastructure and Web3 startups. Web3, DeFi, and infrastructure companies account for the highest number of transactions.
• In the fourth quarter, most investments flowed into startups based in the United States (46%), while Hong Kong companies accounted for 17% of all investment capital. In terms of transaction volume, the United States led with 36%, followed by Singapore (9%) and the United Kingdom (8%).
• In terms of financing, among the 20 new funds, investors’ interest in venture capital funds focused on cryptocurrencies has decreased to $1 billion.
• In 2024, at least 10 cryptocurrency venture capital funds raised over 100 million dollars.

Venture Capital

transaction quantity and investment capital

In the fourth quarter of 2024, venture capitalists invested $3.5 billion in cryptocurrency and blockchain-focused startups (a quarter-over-quarter increase of 46%), with a total of 416 deals (a quarter-over-quarter decrease of 13%).

As of 2024, venture capitalists have invested a total of 11.5 billion dollars in cryptocurrency and blockchain startups through 2,153 transactions.

investment capital and Bitcoin price

In previous cycles, there was a years-long correlation between Bitcoin prices and capital invested in crypto startups, but this correlation has struggled to recover over the past year. Since January 2023, Bitcoin has surged significantly, while venture capital activity has struggled to keep pace. Allocators have shown weaker interest in crypto venture capital and broader venture capital, coupled with a crypto market narrative that favors Bitcoin and overlooks many popular narratives from 2021, which can partially explain this disparity.

phased investment

In the fourth quarter of 2024, 60% of venture capital was invested in early-stage companies, while 40% was directed towards late-stage companies. Venture capital firms raised new funds in 2024, and crypto-native funds may still benefit from large-scale financing from a few years ago. Since the third quarter, an increasing amount of capital has flowed into late-stage companies, which partially explains Tether raising $600 million from Cantor Fitzgerald.

In terms of trading, the proportion of pre-seed transactions has slightly increased and remains healthy compared to previous cycles. We track the proportion of pre-seed transactions to measure the robustness of entrepreneurial behavior.

Valuation and Trading Volume

In 2023, the valuations of venture capital-backed cryptocurrency companies saw a significant decline, reaching their lowest level since Q4 2020 in the fourth quarter of 2023. However, with Bitcoin hitting an all-time high, valuations and trading volumes began to rebound in Q2 2024. In the second and third quarters of 2024, valuations reached their highest levels since 2022. The growth in cryptocurrency trading volumes and valuations in 2024 is consistent with similar growth across the entire venture capital sector, although the rebound in cryptocurrency has been more robust. The median pre-money valuation for trades in Q4 2024 was $24 million, with an average trading size of $4.5 million.

Investment Category

Companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised the largest share of crypto venture capital in Q4 2024 (20.75%), totaling $771.3 million. The three largest deals in this category were Praxis, Azra Games, and Lens, which raised $525 million, $42.7 million, and $31 million, respectively. The dominance of DeFi in the total crypto venture capital is attributed to the $600 million deal between Tether and Cantor Fitzgerald, which holds a 5% stake in the company (the stablecoin issuer belongs to our senior DeFi category). Although this deal is not a traditional venture capital structured deal, we included it in our dataset. If we exclude Tether’s deal, the DeFi category would rank 7th in investment in Q4.

In the fourth quarter of 2024, the share of crypto startups building Web3/NFT/DAO/Metaverse and infrastructure products in the total quarterly crypto venture capital amount increased by 44.3% and 33.5% respectively. The increase in the percentage of capital allocation relative to total capital deployment is mainly attributed to a significant decrease in capital allocation by crypto venture capital to Layer 1 and crypto AI startups, which fell by 85% and 55% respectively since the third quarter of 2024.

If we break down the major categories in the above image into finer parts, crypto projects building stablecoins raised the largest share of crypto venture capital in Q4 2024 (17.5%), totaling $649 million across 9 tracked deals. However, Tether’s $600 million deal accounted for most of the total capital invested in stablecoin companies in Q4 2024. Crypto startups developing infrastructure raised the second most venture capital in Q4 2024, with $592 million (16%) across 53 tracked deals. The three largest crypto infrastructure deals were Blockstream, Hengfeng Group, and Cassava Network, raising $210 million, $100 million, and $90 million, respectively. Following crypto infrastructure, Web3 startups and exchanges ranked third and fourth in funds raised from crypto venture capital firms, totaling $587.6 million and $200 million, respectively. Notably, Praxis was the largest Web3 deal and the second-largest deal in Q4 2024, raising up to $525 million to build “internet-native cities.”

In terms of trading volume, Web3/NFT/DAO/Metaverse/games account for 22% of the transactions (92 transactions), with 37 game transactions and 31 Web3 transactions being the driving factors. The largest game transaction in Q4 2024 is Azra Games, which raised $42.7 million in Series A funding. Following closely are infrastructure and trading/exchanges/investments/lending, with 77 and 43 transactions respectively in Q4 2024.

Projects and companies providing crypto infrastructure ranked second in transaction volume, accounting for 18.3% of the total transaction volume (77 transactions), with a month-on-month increase of 11 percentage points. Following crypto infrastructure, projects and companies that build trading/exchange/investment/lending products ranked third in transaction volume, accounting for 10.2% of the total transaction volume (43 transactions). It is worth noting that crypto companies building wallet and payment/reward products had the largest month-on-month increase in transaction volume, at 111% and 78% respectively. Although these month-on-month increases are significant in percentage terms, wallet and payment/reward startups accounted for only 22 transactions and 13 transactions respectively in Q4 2024.

The large categories in the above figure are subdivided into finer parts, with projects and companies building crypto infrastructure having the highest number of transactions across all industries (53 transactions). Following closely are crypto companies related to gaming and Web3, which completed 37 and 31 transactions respectively in the fourth quarter of 2024, almost identical to the order in the third quarter of 2024.

Investment classified by stages and categories

By categorizing and breaking down investment capital and trading volume, it becomes clearer to see which types of companies are raising funds within each category. In the fourth quarter of 2024, the vast majority of capital in Web3/DAO/NFT/Metaverse, Layer 2s, and Layer 1s flowed into early-stage companies and projects. In contrast, a significant portion of crypto venture capital funding for DeFi, trading/exchanges/investment/lending, and mining has gone to later-stage companies. This is to be expected given the relative maturity of the latter compared to the former.

Analyzing the distribution of investment capital at different stages within each category can reveal the relative maturity of various investment opportunities.

Similar to the crypto venture capital investments made in the third quarter of 2024, a significant portion of the transactions completed in the fourth quarter of 2024 involved early-stage companies. The crypto venture capital transactions tracked in the fourth quarter of 2024 include 171 early-stage deals and 58 late-stage deals.

Check the share of transactions completed by stage in each category to gain insights into the various stages of each investable category.

Investment by Geographic Location

In the fourth quarter of 2024, 36.7% of trades involved companies based in the United States. This was followed by Singapore (9%), the United Kingdom (8.1%), Switzerland (5.5%), and the United Arab Emirates (3.6%).

The company based in the United States absorbed 46.2% of all venture capital, a decrease of 17 percentage points compared to the previous period. As a result, the venture capital allocation for startups based in Hong Kong has significantly increased to 17.4%. The UK accounts for 6.8%, Canada for 6%, and Singapore for 5.4%.

Group Investment

Companies and projects established in 2019 account for the largest share of capital, while those established in 2024 have the highest trading volume.

Venture Capital Financing

Financing for crypto risk funds remains challenging. The macroeconomic environment and turmoil in the crypto market in 2022 and 2023 have made some allocators reluctant to commit at the same levels as in early 2021 and 2022. By early 2024, investors generally believe that interest rates will significantly decline in 2024, although rate cuts will not begin to materialize until the second half of the year. Since the third quarter of 2023, total capital allocated to risk funds has continued to decline quarter-on-quarter, despite an increase in the number of new funds for the full year of 2024.

Calculated on an annualized basis, 2024 is the weakest year for cryptocurrency venture capital fundraising since 2020, with 79 new funds raising $5.1 billion, far below the frenzy of 2021-2022.

Although the number of new funds has indeed increased slightly year-on-year, the decline in interest from allocators has also led to a smaller fund size raised by venture capital firms, with the median and average fund sizes for 2024 reaching their lowest levels since 2017.

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At least 10 cryptocurrency venture funds actively investing in cryptocurrency and blockchain startups raised over $100 million for new funds in 2024.

Summary

• Sentiment is improving, and activity is increasing, although both are still well below previous highs. While the liquidity crypto asset market has significantly rebounded from the end of 2022 and early 2023, venture capital activity remains far below the prior bull market. The bull markets of 2017 and 2021 showed a strong correlation between venture capital activity and the prices of liquid crypto assets, but over the past two years, activity has been sluggish while cryptocurrencies have rebounded. The stagnation in venture capital is due to a variety of factors, including the “barbell market” placing Bitcoin (and its new ETFs) at the center stage, along with marginal new activity from Meme coins, which are difficult to finance and have uncertain lifespans. Enthusiasm for projects at the intersection of artificial intelligence and cryptocurrency is on the rise, and anticipated regulatory changes may open the door for opportunities in stablecoins, DeFi, and tokenization.
• Early trading continues to lead the trend. Despite the resistance faced by venture capital, interest in early trading still indicates the long-term health of the broader cryptocurrency ecosystem. The late-stage trading community made progress in the fourth quarter, primarily due to Cantor Fitzgerald’s $600 million investment in Tether. Nevertheless, entrepreneurs continue to seek willing investors for new innovative ideas. We believe that projects and companies building stablecoins, artificial intelligence, DeFi, tokenization, L2, and Bitcoin-related products will perform well in 2025.
• Spot ETPs may put pressure on funds and startups. Several high-profile investments in spot Bitcoin ETPs by U.S. allocators suggest that some large investors (pension funds, endowments, hedge funds, etc.) may be engaging with the industry through large liquidity tools rather than turning to early-stage venture capital.** Interest in spot Ethereum ETPs has begun to increase, and if this trend continues, or even if new ETPs are launched covering other alternative Layer 1 blockchains, the demand for niche markets such as DeFi or Web3 may also shift towards ETPs instead of venture capital aggregates.**
• Fund managers continue to face a challenging environment. Although the number of new funds in 2024 has slightly increased compared to the previous year, the total capital allocated to crypto venture capital funds is slightly lower than in 2023. Macroeconomic factors continue to pose challenges for allocators, but significant changes in the regulatory environment may reignite allocators’ interest in the space.
• The United States continues to dominate the cryptocurrency startup ecosystem. Despite a regulatory environment that is very tricky and often hostile, companies and projects based in the U.S. still account for the majority of completed transactions and the majority of investment capital. The new presidential administration and Congress will be the most supportive of cryptocurrencies in history, and we expect the U.S. dominance to increase, especially if certain regulatory matters, such as the stablecoin framework and market structure legislation, are solidified as anticipated, allowing traditional U.S. financial services companies to seriously consider entering the space.